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NACM's Credit Manager's Index for October, unveiled Monday, showed little in the way of building about gains reported in September's index...but, importantly, it also showed no signs of retreat.

There was a slight reduction in the index of favorable factors, but the index of unfavorable factors came just a little bit closer to expansion territory. Most economic indicators has been reasonably positive over the past few weeks and seem to be pointing to better months to come. The October CMI index does nothing to dispel this notion, although the slower pace of progress continues to forshadow tepid growth, recovery for any but a handful of sectors.

“The latest data on the expansion of the U.S. economy in the third quarter reinforces the notion that conditions have started to improve, and the retail data thus far has been more encouraging than not,” said Kuehl. “If one looks at the steady rebound in the financial stability of the business community over the last month, there is some reason to assume that conditions will improve even more in the last two months of the year.”

The manufacturing sector continues to gain momentum, with the favorable factor indext surging to levels not seen since May. Service sector performance, meanwhile, was weaker than many had expected given the decent retail performance noted in the last few months. The most startling decline was in sales, though there still was palpable improvement in unfavorable service sector factors, going forward.

The full House of Representatives voted overwhelmingly to repeal an onerous tax provision carrying massive negative consequences for those with government contracts.

The House voted 405-16 Thursday to repeal the 3% withholding tax, which is set to go into effect on government contracts in 2013 if the repeal proposals fall flat in the Senate. The 3% withholding tax was originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. While its goal was to address the nation's tax gap, representing the annual $345 billion in taxes legally owed but left uncollected, the provision would ultimately do more harm than good, wreaking havoc on the cash flow of companies that do business with government entities.

Challenges remain in the Senate, which most recently rejected a similar repeal measures, each which failed on party lines in acts that smacked of the partisanship rife in Congress during recent sessions.

NACM, long a vocal supporter of repealing the 3% withholding provisions, applauds the House vote and urges the Senate to follow suit.

EU heads of state worked through marathon session Wednesday, and into early Thursday, in Europe to come up with plans to address problems revolving around crushing debts among several member nations. The first point agreed upon, as ratified by its 27 member state setup, was to force banks to set up higher capital ratios with the purpose of absorbing what are seen as unavoidable losses, notably from Greece, as nations’ debt problems continue to grow. Banks, which had been required to hold a capital ratio of 5%, must raise the ratios to 9% by June 2012. This is seen as a way to create a cushion, in excess of 100 billion euro, for upcoming losses.

Also, in the interest largely of protecting from still somewhat unlikely worst case scenarios in key economies Italy and Spain, the 17-member block of nations operating on the euro ratified plans to bolster the European Financial Stability Fund and pledged that it would be used for insurance and partial guarantees against losses going forward. The 17 members of the EU on the Euro also came to an agreement, likely through considerable strong-arming, with financial institutions to accept up to 50% losses on Greek bonds. The EU also plans to up the Greek bailout to upwards of 100 billion euro through 2014.

Though the plan may not be finalized until December and could yet face bumps along the way, surges and rallies in bond markets in several of the “PIIGS” nations, the U.S. stock market and oil prices were all experienced through the first few hours of business (EST) Thursday.

In a few days the European Central Bank gets a new head, and after almost a year of knowing who that will be there is still a great deal of confusion as to what Mario Draghi will bring to the post and what his core ideas may be. As Draghi comes to office the situation in Europe could hardly be more stressed, and there are no shortages of suggestions as to what the ECB should do now.

At the top of the list is for the ECB to take a risk and move away from the orthodox policies that have thus far failed to arrest the financial distress in Europe. It would make the ECB lender of last resort to the troubled states of Europe and, in the process, force the ECB to accept a much greater level of risk than many would be comfortable with. The majority of analysts assert that the three key issues are getting Greece on some path toward financial independence, somehow keeping the major nations in Europe from a public debt meltdown and, finally and most importantly, preventing a collapse of the banks. For a variety of political reasons euro zone leaders seem incapable of dealing with any of the three, and that is throwing the whole mess back into the lap of the ECB.

Analysis: What is the ECB expected to do? There are those who suggest that, in the absence of any real policy from the political leaders, the ECB has no choice but to act in a manner that will make the inflation hawks in Europe go into apoplexy. The assertion is that the policies of the ECB have worsened the debt situation for the major nations.

Investors look at the situation facing Italy, Spain and the others, and they have to assume the worst. If the Italians are not able to borrow enough money to cover obligations, they will face untenable alternatives. They could try to emulate the Greeks with massive austerity efforts designed to slash the budget, but we have all seen how well that strategy works. The investor has to assume that Italy is entirely capable of sliding into default and that drives up the yields of the bonds that Italy wants to sell to bolster its economic growth. That is a doomed strategy, and without options these states face nearly impossible short-term challenges.

What is needed is the ECB as a backstop—the place that these nations can always turn to when they need the money. If the investor thinks that Italy, Spain and the others will have an alternative, they become somewhat more willing to take risks and perhaps purchase those beleaguered bonds. The objections are strenuous, as many are very uncomfortable with an ECB that is pursuing such a loose strategy, one that seems to invite inflation as well as excessive risk exposure to nations that don’t have good fiscal track records.Source: Chris Kuehl, NACM Economist

President Barack Obama signed three free trade agreements (FTAs) with Panama, Colombia and South Korea into law last Friday. The three agreements had been pending since their original establishment during the Bush Administration.

Each FTA was enacted in its own bill, clearing the way for each of them to enter into force and make exporting to these three countries easier than ever. Including Panama, Colombia and South Korea, the U.S. has now negotiated FTAs with 20 nations.

The agreements could potentially generate a windfall for several industries and create several thousand new jobs. “We’re eager for American businesses and workers to begin reaping the benefits of these hard-won agreements,” said United States Trade Representative Ron Kirk following the President’s signature. “We know that more exports of Made-In-America goods and services flowing to consumers and Korea, Colombia and Panama can support tens of thousands more jobs here at home. Supporting more American jobs with responsible trade policy has always been our goal.”

Responses from Congress were also uniformly ecstatic over the passage of FTAs that were considered by many to be long overdue. “Today’s signing of three jobs bills passed by Congress last week shows America is getting back in the game. Finally, we are sending a signal to our competitors and allies alike that the United States is committed to a robust trade agenda that levels the playing field for workers in Michigan and across America, consumers and businesses and creates new markets for our goods and services,” said Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee. “But it’s more than that—with 95% of consumers living outside of the United States, we have to move ahead with such agreements or else our competitors in Europe and Canada will seize these markets from us and from our workers.”

“I commend the President for realizing that these trade agreements are a catalyst for creating hundreds of thousands of American jobs, something our economy desperately needs right now,” he added.

The Senate rejected a motion to end debate yesterday on a bill that would repeal the 3% withholding tax, set to go into effect on government contracts in 2013.

Earlier this week, Senate Minority Leader Mitch McConnell (R-KY) quietly introduced S. 1726, the Withholding Tax Relief Act of 2011, which is nearly identical to H.R. 674, a repeal measure in the House of Representatives that was recently voted out of the Ways and Means Committee with overwhelming support. McConnell moved for cloture on S. 1726, meaning consideration of the bill would end and the legislation could proceed further, but the motion failed in a 57-43 vote. Cloture ultimately requires three-fifths of the full Senate, or at least 60 votes.

While the House is expected to vote, and likely approve, H.R. 674 next week, the failure of the Senate’s cloture vote indicates that the entire repeal effort risks falling victim to a severe party-line divide and partisan gamesmanship.

The failed cloture vote in the Senate came along with another failed vote on a portion of the American Jobs Act, a bill championed by President Barack Obama. Senate Republicans, joined by three conservative Democrats, blocked a bill, S. 1723, the Teacher and First Responder Stabilization Act, taken from a portion of the full American Jobs Act that would’ve given states money to hire or retain teachers, police, firefighters and other emergency responders.

By carving this section of the bill out and forcing Republicans to vote on it, and reject it, Senate Democrats now have a talking point with which to hammer conservatives, arguing that they are unwilling to support tax increases for millionaires, even if those tax increases would help keep teachers and emergency responders employed.

Similarly, McConnell’s decision to isolate the 3% withholding repeal in S. 1726 gives Republicans a chance to portray Democrats, all but 10 of whom voted against the measure, as anti-business and to suggest that the entire party is committed more to taxes than economic growth.

The 3% withholding repeal, which not too long ago may have seemed like a bipartisan slam-dunk, now hangs in the balance.

Originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005, the 3% withholding tax will apply to payments from local, state and federal government entities to their contractors starting in 2013. While provision’s goal was originally to address the nation's tax gap, which represents the annual $345 billion in taxes legally owed but left uncollected, and ultimately address contractor tax compliance, the provision punishes all government contractors, rather than just those that flout their tax requirements. The provision would wreak havoc on the cash flow of companies that do business with government entities, especially smaller businesses, upon whom the burden would fall hardest.

NACM has opposed the 3% withholding tax since its introduction and hopes that both parties can reach an agreement resulting in the end of this harmful provision. For more information on NACM’s effort to repeal the 3% withholding tax, click here.Jacob Barron, CICP, NACM staff writer

Though a hearing on the Thompson and Pennsylvania government's opposition to Harrisburg's Chapter 9 bankruptcy filing is tentatively scheduled for Nov. 23, the governor may have thrown a wrench into the entire matter already by signing a new law that paves the way for the state to declare a fiscal emergency and take over the financial decisions of the city.

Governor Tom Corbett signed Senate Bill 1151 that decries whenever a third-class Pennsylvania city (a category into which Harrisburg fits) fails to implement a fiscal recovery plan when facing insolvency, the governor will be given power to declare fiscal emergency once a city becomes insolvent or is projected to within 180 days. Also, the city in question, in this case Harrisburg, will have 30 days to develop and adopt an acceptable fiscal recovery plan to avert a state takeover of financial decision-making. Without one, which is unlikely in Harrisburg, the takeover would begin immediately after the designated 30-day period. This all could very well affect the recent bankruptcy filing, though the extent remains somewhat unknown.

“I remain a strong proponent for municipal governments tackling their own problems and coming together to develop a fiscal recovery plan when necessary,” said Corbett. “But when that fails to happen, the state has to take action to ensure public safety…the state will intervene.”

As noted on NACM's blog and eNews this week, Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so believe it gives the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors.

The dangerous game U.S. lawmakers and businesses are playing on the issues of trade and currency policy in China, ones that perceivably give them unfair market advantages, took another step forward as a group of solar energy product manufacturers have fired a proverbial shot across the Chinese bow.

Stung by a steep downturned caused as much by foreign competition as domestic saturation or the economic malaise at home, a group of solar product manufacturers has filed a formal petition asking for significant duties/tariffs on Chinese-made imports of such products. The Coalition for American Solar Manufacturing, comprised of more than a half dozen U.S.-based firms lead by SolarWorld Industries America Inc., alleges China has been offering its producers illegal subsides, and its companies are “dumping” products in the United States, selling them at artificially low prices to undercut producers here.

The filing has generated at least some interest from the U.S. Department of Commerce and International Trade Commission. It comes in the same month as a hot, renewed push by the U.S. Senate on a proposed bill to demand the Chinese government allow its perceived artificially low currency value appreciate to appropriate, accurate levels. The perceived undervalued currency provides what many have seen as a massive trade advantage over its partners.

Chinese government and solar manufacturing officials denounced the move, with talk similar to that following the proposed Senate bill. Parties bandied about words like “protectionism” and argued the move could hurt both trade relations and the entire solar/alternative energy movement itself.

The highly publicized coalition filing comes on the heels of massive struggles on the part of U.S. solar product manufacturers. Stirling Energy Systems Inc. is the most recent to file for Chapter 7 protection in U.S. Bankruptcy Court in Delaware. It followed previous filings by SpectraWatt Inc., Solar and recently controversial Solyndra, a firm with ties to the Obama Administration reportedly being investigated federally for fraudulent business practices. Months before, BP solar operation halted its Maryland-based solar activities in favor of relocation abroad. The common theme outlined by all five solar operators was this: they can no longer compete with Asian producers who are undercutting them so drastically on pricing and costs.

The Federal Reserve’s periodical roundup of economic conditions in each of its 12 districts throughout the nation finds that, in most areas, growth is continuing but at a notably weaker pace than the same time last year. Additionally, the word of the day appears to be “uncertainty.”

The Fed’s Beige Book roundup finds growth best characterized as “modest or slight,” with a decidedly slower pace than in recent months or early fall 2010. Though not every industry sector or district is reporting bad news, conditions are not nearly as positive as had been expected because of long-time “expert” predictions that, by this point, the economic recovery would be in or near full-swing.

Consumer spending, overall, was up for the recent six-week period ending in early/mid-October. However, much of that was driven by auto sales and tourism increases. Businesses also increased spending in most districts, with areas of construction and mining equipment as well as auto-related products setting the pace. Yet, in a continuation of the good news-bad news theme, Fed contacts noted particular “restraint in hiring and capital spending plans:”

Manufacturing, long the proverbial bread-winner among all industries during the slow recovery period, showed improvement from the declines reported in the last two Beige Book periods. Again, the auto producers performed best.

On the credit front, a lengthy period of small improvements in credit conditions are ceding in some areas for anyone not in the very top tier of borrowing. That said, demand remains stunted anyway, especially in districts like Chicago and Kansas City. Also important to those two districts were declines in the agriculture sector. While yields have not fallen to shortage level, almost unilaterally, yields are noticeably down for this time one year ago. Part of this is fallout from unpredictable and/or uncooperative weather earlier in the year, especially in the central-south part of the country.

Though quieter and less market-riling than a move weeks ago by Standard & Poor’s to downgrade the United States' sovereign credit rating on debt and global economic slowdown concerns, another firm has issued a sort of cut as well to the Americans.

The U.S., along with economic powerhouses Germany and France, were among six stripped of their “positive watch” status through Coface, which annually publishes the highly-touted “Handbook of Country Risk” outlining payment and collections trends and practices. Coface noted the moves were made largely on the collateral damage of the EU- and, to a somewhat lesser extent, U.S.-economic stumbles. In all, 10 received some sort of lessened status in the update.

Coface noted that newly expected lower levels of U.S. growth through late 2011 and 2012 are “likely to result in an increase in bankruptcies, particularly for small and medium-sized companies...”

Editor's Note: For more on the Coface risk update, check out the story in the upcoming eNews, out late afternoon Thursday.

Harrisburg Mayor Linda Thompson, with backing from the state of Pennsylvania, is striking back at her own city council for their move to enter the capital city into municipal bankruptcy.
Last week, the NACM blog reported Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so believe it gives the city leverage to renegotiate debt, largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit not proportional to that of investors.

However, Thompson and the state have now filed a motion in U.S. District Court to have the bankruptcy filing voided, arguing the city council, by statute, does not have the authority to authorize a bankruptcy filing without the documented support of the city mayor, and that it acted improperly in the filing. Thompson, following a failed bid by the state to stymie the bankruptcy, offered up a financial plan to avoid such a filing that included raised taxes and the selling of some city assets, namely parking structures and the aforementioned incinerator operation. Like the state’s plan, the city council rejected Thompson’s plan by a narrow margin.

A hearing on the Thompson/state motion is tentatively schedule for Nov. 23.

Though Moody’s Investment Services has been the most maligned of the three top, U.S.-based credit ratings agencies by the European Union in recent months, the latest moves made by Standard & Poor’s are likely to draw ire from the so-called “PIIGS Nations” and those supporting bailout efforts alike.

In downgrading the credit rating of the city of Barcelona Monday, S&P again clarified the reasons behind its deepening concerns over the key European economy of Spain, which itself received a sovereign credit rating downgrade on Oct. 14. S&P noted that despite “signs of resilience” in the Spanish economy, there are deep problems to worry about, primarily including the state of trade partners in other “PIIGS” members struggling with debt (Portugal, Ireland, Italy, Greece). The following were listed as the top reasons for the downgrade of Spain, from AA- to A-1+, as well as the “negative” outlook going forward.

“Spain's uncertain growth prospects in light of the private sector's need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment.

The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to Group 4 from Group 3.

The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.”

It’s neither the first nor, likely, the last downgrade of an EU member amid the ongoing global economic malaise and debt conundrum. However, it’s among the most notable because its economy is much larger and more critical that some of its neighbors that have struggled in such mighty fashion. Brian Shappell, NACM staff writer

The House Ways and Means Committee approved a bill yesterday, H.R. 674, that would repeal the 3% withholding tax. The legislation is expected to reach the House floor for a full vote before the end of the month.

Should the bill be signed into law, it would eliminate a provision that requires all local, state and federal entities to withhold 3% from their payments to contractors starting in 2013. H.R. 674 was approved by voice vote, a procedure typically used for measures that are non-controversial and enjoy widespread bipartisan support.

“Today we have taken an important step in doing what Americans have called upon Congress to do: work together in a bipartisan way to encourage job creation,” said Rep. Wally Herger (R-CA), the bill’s original sponsor. “The 3% withholding tax stands in the way of jobs because it threatens to constrict the cash flow of thousands of small businesses that provide goods and services to federal, state and local government agencies. Permanently repealing this tax is an important step toward giving these businesses the assurance that it’s safe to invest, grow, and hire more workers.”

“We’re looking for actions Congress can take to create jobs right now. This is a win-win. I urge all members to support this legislation,” he added.

As reported in yesterday’s edition of NACM’s eNews, the 3% withholding tax was originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. While its goal was to address the nation’s tax gap, representing the annual $345 billion in taxes legally owed but left uncollected, the provision would ultimately do more harm than good, wreaking havoc on the cash flow of companies that do business with government entities.

Prior to the markup, NACM sent a letter in support of H.R. 674 to Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI). NACM has opposed the 3% withholding requirements since its enactment and welcomes the repeal bill’s progress.

For more information on NACM’s fight to repeal the 3% withholding tax, click here.

The Export-Import Bank of the United States Reports authorized $32 billion in export financing in FY 2011 (Oct. 1, 2010-Sept. 30, 2011), which supported more than $40 billion worth of exports, according to statistics unveiled Thursday by the organization.

Fred Hochburg, Ex-Im Chairman/President, noted the particular growth in authorizations for small businesses to $6 billion for the year, about double the level posted just three years ago. He said small businesses were a key part of President Barack Obama’s loft goals for exporting through 2014.

“We’re not going to double exports unless we double small business exports,” he said. “We’re leveling the playing field and making sure small companies and large companies can go toe-to-toe with foreign companies, and we do it at no cost to the U.S. taxpayer.”

Hochburg said among other considerable increases in Ex-Im funding was one in the renewable energy sector, up from $30 million three years ago to $720 million in FY2011 for financing for foreign buyers to purchase from U.S. companies in the industry, largely on projects/partnerships in areas of Canada, India and Turkey. Mexico, however, remains the largest national market for Ex-Im authorizations. Columbia grew the most in 2011, a point not lost on Hochburg during a question-and-answer session Thursday, one day after Congress passed a free trade agreement between the Latin nation and the United States among a trio of pacts.

“Of the three, Columbia offers most promise where we [Ex-Im] can play a role,” he told NACM. “There’s a lot of promise, the business community leans forward and it’s right in our back yard.”

Ex-Im authorizations for 2010 of about $24.5 billion, a record until the latest statistics, supported $34.4 billion worth of exports and 227,000 American jobs at more 3,300 U.S. companies.

After years of languishing and political one-upmanship on both sides of the political aisle, three Free Trade Agreement (FTAs) were passed Wednesday by both houses of Congress and awaits what should be a rapid signature by President Barack Obama.

Approval of the FTAs with South Korea, Panama and Colombia has long been seen as important to boost business for U.S.-based companies feeling the pinch of lower domestic demand. The FTAs, in theory, will significantly expand U.S. exports in those markets, help small businesses and lower tariffs on American goods.

Getting the measure through though has seen supporters and opponents alike coming from both political parties as the idea of job protectionism divided lawmakers more on regional lines than the usual partisan ones.

Obama submitted the nation's three pending free trade agreements (FTAs) to Congress earlier last week amid growing support for the measures. Obama, branded by some in the past as anti-business, has become increasingly pro-exporting and is in the midst of a federal push to double exports within five years.

Congressional leaders have been quick to laud the FTAs’ passage while lamenting the lengthy delay between their creation and their submission for approval. Among reasons for disappointment is that other agreements that, despite being started at a later date, were enacted months before Wednesday’s eventual positive vote. Among them was a European Union deal with South Korea.

Submission of the FTAs by the president was previously contingent on Congress' renewal of the Trade Adjustment Assistance (TAA) program, which trade workers perceived to be negatively affected by international competition. After a pared-down version of the TAA was approved in the Senate, however, the president submitted the agreements to the House, which somewhat begrudgingly followed through on the TAA renewal in addition to the FTAs.

Just one day after California passed a law designed to slow the pace of cities declaring bankruptcy there (see Tuesday's blog posting), another state’s previous effort to prevent a Chapter 9 filing by its capital city failed on a narrow city council vote Tuesday.

In what has been building for months, Harrisburg, PA’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Reports indicated a bankruptcy petition was faxed to U.S. District Court soon after. Supporters of doing so believe it gives the city leverage to renegotiate debt, largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit not proportional to that of investors.

Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference on the topic today at 3 pm (EST) noted the municipal bankruptcy issue has potential to grow significantly in the coming months on struggles to pay for things such as skyrocketing health care and pension obligations as well as lower revenue and construction-related debts tied to the ongoing economic downturn.

For more information on today's teleconference, including how it will affect credit managers, or to register,

In what has potential to emerge as a late 2011/early 2012 buzz topic, another state has moved to toughen the process for debt-saddled municipalities to declare for bankruptcy protection.

California Gov. Edmund “Jerry” Brown this week signed Assembly Bill 506, which will require municipalities seeking the ability to file Chapter 9 to either declare a fiscal emergency or document efforts to negotiate with creditors prior to such a filing. Though promoting it as otherwise, the move appears to be a thinly veiled effort to pump the brakes on the slowly emerging trend of municipalities considering Chapter 9 as an increasingly viable option to beat financial woes. Pennsylvania promoted somewhat similar legislation over the summer. Brown said the legislation “puts in place reasonable steps for local governments to take before filing bankruptcy…let’s be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path.” He continued the goal was to find “alternative, less drastic solutions” then filing.

The municipal bankruptcy issue has become an increasingly hot one for businesses/creditors that do significant selling on terms to municipalities, especially ones now struggling, amid the ongoing financial crisis and increasing entitlement issues. This year, about a half-dozen municipalities filed for protection under Chapter 9 with the latest of which emanating out of Central Falls, RI. Jefferson County, AL narrowly avoided it thanks to a $1 billion renegotiation approved by debt-holders tied to a sewer rehab project, and Harrisburg, PA continues to weigh what appear to be a very narrow set of options as creditors for a failed trash-incineration project haven’t been so flexible.

Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference Wednesday on the municipal bankruptcy issue, listed skyrocketing health care and pension obligations as well as lower revenue and construction-related debts both tied to the ongoing economic downturn among top reasons for the growing trend. He noted that specifically in California, the state capital city of Sacramento alone has unfunded retiree health care liabilities of $245.6 million and that the bankruptcy filing in the city of Vallejo is among the largest in U.S. history.

For more information on or to register for Wednesday’s teleconference on this topic and how it will affect credit managers, click

The major steel companies have all been releasing some pretty grim forecasts as they look ahead. All they can see at this juncture is weakening demand globally -- they are already seeing many of their consumers cutting back drastically on orders.

China has been added to that list in recent weeks, and that causes the greatest concern. The facts have been accumulating for some time as the major steel consuming industries slump. There has been some limited recovery in the automotive sector, but there is nothing suggesting that robust recovery is imminent. (While we are on that subject, last week it was reported that more than 13 million cars were sold in recent weeks and omitted to mention that was an annualized number—and therefore not as impressive as it appeared.)

Analysis: The price collapse is likely to extend well into 2012 unless there is some dramatic rebound in demand from some key sectors. The construction industry is the prime consumer for much of the steel output, and it is moribund the world over. There is nothing to suggest that this will change in the near future and steel prices are now projected to be at $837 a ton by the end of the year—8% lower than they were in May. This would be better news for the steel consumers if they had more demand. That is the dilemma. The price of steel is falling because there is limited demand for the commodity, and there is limited demand because there is even more limited demand for the products that companies make with that steel. As these companies see more business and more opportunity, the price of steel will then start to rise.

In what will surely draw the ire of member nations in the European Union, Moody’s Investment Services has moved to cut Italy’s credit rating on concern stemming partly from contagion related to other high-debt PIIGS Nations (Portugal, Ireland, Italy, Greece, Spain). Italy’s government bond ratings to A2 with a negative outlook from Aa2.

Moody’s explained the reasons beyond the downgrade as follows: "(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis. (2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook. (3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

The downgrade reflects the weight of these growing risks relative to some positive credit attributes. These include a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer. Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. A country's susceptibility to shocks is a key factor under Moody's sovereign methodology.

The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.”

A happy U.S. Chamber of Commerce has weighed in on the White House's move Monday to send three long-delayed free trade agreements (FTA's) with South Korea, Panama and Columbia -- featured as story #4 in last week's NACM eNews at www.nacm.org/enews.html -- on to Congress for what appears to be an imminent vote, applauding the action.

From U.S. Chamber of Commerce:

"'America is finally getting back in the game,' said U.S. Chamber President and CEO Thomas J. Donohue. 'These agreements are about creating jobs and ensuring a level playing field for trade.'

The trade accords will immediately eliminate tariffs on most U.S. exports to the three countries. Colombia currently collects $100 in tariffs on U.S. exports for every $1 the United States levies on Colombian goods, and a similar lopsidedness holds back U.S. exports to South Korea and Panama as well.

In addition to ensuring fairness and accountability, the agreements will open services markets and strengthen intellectual property rights.

The European Union-Korea Free Trade Agreement and the Canada-Colombia FTA entered into force on July 1 and August 15, respectively. Korea has eliminated tariffs on more than 90% of EU goods, leading to increased sales and market share for European companies while U.S. market share has declined."

The body count of U.S.-based solar product manufacturers rose as yet another western-based firm has filed for bankruptcy. However, perhaps illustrating how tough times have gotten for the industry, this one has moved straight to the liquidation phase.

Arizona-based Stirling Energy Systems Inc. has filed for Chapter 7 in U.S. Bankruptcy Court in Delaware. At least four of such companies have now filed some form of bankruptcy since August. Like the others, Stirling is blaming the lack of demand amid the stumbling economy and under-cutting on pricing and cost for Asia-based competitors. Also in play are massive problems with saturation and over-investment during the boom years, relative to demand, which was highlighted earlier this year in NACM’s eNews and Business Credit Magazine.

Others who filed for bankruptcy protection under Chapter 11 include California-based SpectraWatt Inc., Massachusetts-based Evergreen Solar, and Solyndra, also based in California. Months before, BP solar operation halted its Maryland-based solar activities in favor of relocation abroad to save costs.

Solyndra has been in the spotlight, more so than the others, because of the large federal government grants it received, its ties to the Obama administration, an FBI raid on their offices on the days following their Chapter 11 filing and a present Congressional investigation into its principals’ business practices.

The markets are off again today as the debt situation in Greece spins more out of control with every passing hour. The news from Athens is as grim as it can be despite the fact that some progress on the bailout was made last week. Presently, it appears that anything the euro zone comes up with will be too little and too late.

The Greek government has announced what everybody already knew—they will miss their deficit targets this year. The hope had been to get the deficit down to about 6.8% of GDP, but the reality is that the deficit will be close to 8.5% of GDP all while the economy as a whole is contracting by 5.5% as opposed to the 3.9% that had been predicted earlier. Greece has managed to enter a vicious cycle. The nations in the euro zone are demanding that Greece put its financial affairs in order with brutal austerity measures, but these moves only slow growth more.

In order for the country to get hold of its financial situation, it is being forced to engage in waves of austerity efforts, and this means cutting tens of thousands of people from the government payroll at the same time that tens of thousands of others are seeing their pay decrease radically. It is hard to argue that these are not necessary measures to some extent as even the most casual observer can see that Greece has a bloated public sector. This has to change, but the pace of this reform is extreme and hurling Greece deeper toward a downturn from which will be difficult to recover. The reaction from the population is predictable as well: rioting, protesting and striking.

Analysis: The most likely scenario here is as follows: The Andreas Papandreou government will accede to the demands of the Germans and the International Monetary Fund and agree to more draconian austerity measures. This will involve cutting deeply into the government and quasi –government jobs that make up the biggest part of the Greek budget.The public reaction to the mass job cuts will be overwhelming, and the Papandreou government will likely lose many of its members. This will create a crisis in the government, as the Socialists lose their ability to control the parliament without the opposition being in a position to take over. The resulting civil unrest will be beyond the ability of the police to control, and the military will be called upon to engage. The entire nation could essentially shutdown until something radical takes place. The most pessimistic assessment of this situation ends with the military taking control of the system in some kind of martial law action.

The only way all of this is averted is if the nations demanding Greek compliance with radical austerity relent and decide that reform in Greece is going to have to take far longer than they would prefer. As logical as that position may be, there is a steep political price to pay for such a move, and it is not at all certain that the leaders of the north will be willing to pay it.

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